PROBLEM #5 A notable source of income for movie theatre owners comes from food s

Question

PROBLEM #5
A notable source of income for movie theatre owners comes from food sales at their
concession stands. Suppose the demand for medium-sized popcorn servings on Saturday
nights at movie theaters is: Qd = 200 - 15Pp + 2Pn - 5Pc. In this equation, Pp is the price
per medium-sized popcorn; Pn is the price per serving of nachos; and Pc is the price per
bag of candy. From the information in the equation, determine whether nachos are
substitutes or complements for popcorn. Is candy a substitute or complement for
popcorn? Briefly explain each answer.


Assume that the supply curve for popcorn is determined by the following: Qs=12Pp.
Assume further that today’s price of nachos is $6 per serving and of candy is $4 per bag.
Determine the equilibrium quantity exchanged and price of popcorn.

Next consider the more general relationship between the price of popcorn and the price of
candy. Assuming that the price of nachos continues to be $6 per serving, but allowing
the price of candy to vary, find an expression for the equilibrium price of popcorn as a
function of the price of candy. Clearly show your computations in deriving your result.

Explanation / Answer

Qd = 200 - 15Pp + 2Pn - 5Pc

From this demand curve, we can tell that nachos are a substitute and candy is a compliment to popcorn. When the price of nachos increases, the demand for popcorn increases, indicating that consumers substitute away from nachos and toward popcorn. However, when the price of candy increases, the demand for popcorn decreases, indicating that consumers prefer to consume popcorn and candy jointly as compliments.

For the second part, we make the proper substitutions:
12PP=200-12PP+2(6)-5PC

24PP=212-5PC

PP=(1/24){212-5PC}

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